What should I do with my house?

By Stew

house-cropped

Okay, I am going to lay it all out and see what you think.

We own a home in another state. I am gainfully employed and making a decent wage – at least for us – in our new location. We are coming up on fourteen months since our move and we have had little or no interest in our home. When we last refinanced, our home was 90% mortgaged. We used most of the money from our second mortgage to improve the home just before the subprime mortgage crisis hit.

Our house has plummeted in value over the last year and a half. The mortgage is now worth 120% of the value of the home. A drop in value would not be so bad if we were living in the house, but the problem is that we now live in a different state.

We have stayed current on our mortgage, home equity loan, insurance, utilities and property taxes by rustling up extra income as best we could. We had a renter in the house for a short time, but the rent did not cover our expenses. Our monthly obligations for this house are between $1,000 and $1,200 per month, depending on utilities.

Our credit score is currently very good – in the top 10% of all credit scores, but this month we officially go into the red. We have a little bit of wiggle room since I recently took out $14,000 by virtue of a 0% APR balance transfer through March of 2010. We have exhausted our savings (other than the balance transfer money) and have cashed out most of our retirement savings.

Here are my options as I see them:

Short sale

This means we lower the price as far as possible to get it to sell. I think this means that our second mortgage probably does not get paid and our first mortgage holder gets what they gets. In a short sale, the balance of the loan counts as household income on my tax return next year. So if my loan amount is $150,000 and I sell it for $90,000, I have to report the difference of $60,000 as income to the IRS next year. Lovely.

It is unclear to me how this strategy affects my credit.

Foreclosure

Just quit making payments. I have seen some calculators where a foreclosure only dings my credit score by 100 points – which is not too bad since my rating is very high. It seems to me that there must be more to this penalty.

Bankruptcy

Thankfully, this is not strong a possibility at the moment, unless I lose my job. We could be living relatively comfortably on my income if we did not have this house. In fact, we probably could have put $8,000 to $10,000 in the bank this last year . . . instead we have stayed current on our payments and have nothing to show for it.

Deed in lieu

With this strategy, I strike a deal with the second mortgage company where I agree to pay them or they forgive the loan or let me pay it off at a reduced rate. As a result of our agreement, they release their lien on the home. I then simply give the house to the first mortgage holder and beg them not to foreclose. I have friends who made this work and it did not affect their credit, however,for most of them, they executed this strategy before this current crisis.

Status quo

Stick it out, keep making payments and hope it sells sometime in the next year. The problem is that I would be very unlikely to recoup my investment, unless home values shot up 30% in the next year. The payments I am making are not going into equity and in the meantime I am making no retirement contributions and we have no savings or emergency fund.

So you can see, we are in a pickle.

I am not desperate or worried – I am confident that God has a plan. Even in bankruptcy, He will meet our needs. However, that fact does not excuse ignorance or laziness on my behalf. I am researching every possible option in order to make the best decision for my family and our future.

Most GLBL readers are smart people – any thoughts or suggestions?

Photo by dingbat2005


39 Responses (including trackbacks) to “What should I do with my house?”

  1. DDFD at DivorcedDadFrugalDad.com Says:

    Stew the landlord??? Just a thought . . . I know you mentioned it not meeting the expenses, but it would ease the bleeding.

  2. the weakonomist Says:

    The trend is certainly to do a foreclosure. I don’t know which will save you the most money and pain in the long run, but doing a short sale would be best for the bank and getting rid of the house quickly. It also keeps you from having to say you’re bankrupt or ever had a foreclosed house. Best of luck, that is one sour pickle you’ve got.

  3. ABCs of Investing Says:

    Wow, tough situation. I don’t know the best strategy for you but I do have a few comments:

    1) Why is the credit score so important to you? Does it really matter that much?

    2) I’m sure you’ll get comments about “honoring” your contract with the mortgage company – this is BS – they took a risk just like you did. If you have the give the house back then do it – that’s part of the contract.

    3) Do something soon – you’ve let this drag on way too long and it has cost you a lot of money. You need to fix this situation now.

  4. Christy Says:

    I don’t know the answer to your house issue, but I sure hope you’ll use your experience to help other people avoid making the same mistake. You are not ‘gathering little by little’…you’re bleeding money.

    I wish you the best and I’m praying for your family.

  5. Christina Says:

    My husband and I are in a similar situation at the moment. We have a house across the country, which we moved from 15 months ago due to a better job closer to my family. We also have a high credit score and make a decent living – double what we were making when we lived in our previous location. But we are unable to buy a house until we sell ours (we simply can’t afford it) and it’s very unlikely our house will sell anytime soon. My realtor suggested a short sale, she believes there is a way to do it without affecting your credit score. She is going to find out more information for us.

    In the meantime, we are trusting God, although it is very difficult at times. We have had someone go into contract to buy our house, only to back out the day of the closing. We have also had many almost-renters. Just wanted to let you know that we are also going through a similar problem, and your family will be in our prayers!

  6. Baker @ ManVsDebt Says:

    Stew,

    You should consider opening up your options to include lease-options & renting (again). Also, you’ve not specifically mentioned anything about you Realtor. Are you happy with the situation? Is it a friend? My suggestion is that you might want to switch this up, even if it’s a friend. It can’t possibly hurt.

    I don’t know how you rented the first time, but you should also strongly consider a reputable Property Management company. They are worth way more than the 10% average fee, especially for people out of state.

    Any income is better than no income and you can always try to re-sell again down the road. As a Realtor, I had success opening my clients homes to lease-options, too.

    I think you have an obligation to sweat this out as long as you possibly can. Of course, it doesn’t come before your family or values, but from the sounds of it you still have some options left. I applaud you for using this forum to gather ideas first, rather than taking what might be an easier road out.

    Good luck on whatever option you may choose!

  7. Stew Says:

    Baker, I have been thinking about renting again. We had an ideal renter situation before and I’m not sure that we could get that same scenario again . . . You do have a a good point about some income being better than none. Without a renter, we have approx. $1200 worth of obligations per month – the max rent we could charge is around $700. A $1200 deficit v a $500 deficit.

    I believe our realtor is doing a good job.

    I think that I am most worried about having no emergency fund or savings over the course of the next year.

  8. Bri Says:

    According to a piece I saw on CNN, short sales benefit the bank b/c they get their money without as much output of money (since you are the one selling the house as opposed to them doing it if it went into foreclosure), however it has the same impact on your credit score as a foreclosure. Hope that helps to at least give you more information. I would think you would be better off trying to get another renter in there and holding on to the house if you are concerned about the effect on your credit score.

    Here is a link to the article: http://money.cnn.com/2009/05/08/pf/saving/real_estate_willis.moneymag/

  9. Gina Says:

    A rock and a hard place. Call Dave Ramsey (888-825-5225). I recently heard him tell someone in a similar situation to ‘stick it out’ for a little while longer.

    To Baker@Manvsdebt’s point, Dave might have a list of real estate ELP’s (endorsed local provider; http://www.daveramsey.com) in the area where your old house is located. And Glbl guy choose to go w/a prop mgmt company earlier this year when his house didn’t sell (renting option).

    The red flag for me is the $14k on ccard. That will come back to bite you … hard.

    Good idea to put it out there for us to help. Some will ‘stick it to you’ and others will ‘stick by you’. Sorry couldn’t resist.

    Good luck – we’re praying for you.

    P.S. Reality check … Foreclosure drops your FICO by 200-250 points. A repo’d car is 100 points. You bankruptcy will not make this go away and they cost money too.

  10. Diane Says:

    Obviously this is a really difficult situation and you want to do the right thing. I’m not qualified to say what that is.

    I would certainly consider renting or leasing to stem the bleeding somewhat. A $500 deficit is better than $1200. The utility cost should be the renter’s expense if someone is in the house, so if you can rent it that will reduce your overall expense and the variation in utility cost should not matter to you.

    If you can hang on for awhile the market may improve. What is the market like overall in the area where your house is located? Are other houses selling? What is the prognosis for the market there? Housing sales are more depressed in some areas, so I would take that into account.

    I would absolutely avoid foreclosure or bankruptcy at all costs. The other options I just don’t know enough about, but do your research carefully.

    I wish you and your family the best possible outcome in this!

  11. G-dub Says:

    A foreclosure or short sale will have about the same impact on your credit profile. With a foreclosure, the mortgage holder can sue you for their loss (mortgage balance – money the house brings at auction), but the likelihood of that happening varies widely based on many factors; you should consult an expert. Deed in lieu agreements can be difficult to negotiate, and will still have a similar impact on your credit. Selling the house would be best, obviously. If you can’t, most experts heartily recommend against being a ‘long distance landlord’. With the mortgage and the credit card debt and exhausted savings, a chapter 13 might actually be a good move because the credit hit will be about the same as a foreclosure, and a foreclosure won’t 100% protect you from further claims – but a BK absolutely will. However, you would need to wait at least 6 months after initiating the balance transfer before you file a BK. A BK does not have nearly the stigma it once had; many corporations and wealthy individuals have used the BK provisions to free themselves from untenable situations.

  12. kathy Says:

    I sent a reply on my email but I am not sure it went through so I’ll send again. God’s plans don’t include cash advances on credit cards! I am part of my church’s finance team and we host Dave Ramsey’s FPU a couple of times a year. Dave would say go for the short sale. It would be a wise investment to consult a lawyer familar with real estate or mortgage law to get accurate information about possible tax implications. You are in a very precarious financial position. The heck with the credit score! Our family is also experiencing (like so many others) challenging financial times. BUT, I believe that God is my source( not the Babylonian financial system that is falling apart) and my provider. I also learned at the same time that my income is not limited to my salary and that God has a plan for me and my family and that I can thrive in the midst of downturns because I choose to believe God and His word and tithe my income. God bless and continue to seek wise counsel

  13. jimmy Says:

    i have to assume a few things first. if you exhaust your retirement & nest egg holding on to this other house and something really bad happens you could be left with a real diaster and lose everything. on the other hand since you are spending your retirement savings now if the lord does not come soon what are you going to live on? I pray that god can & will give you direction and in your case that you pray long and hard about the answer. now for my opinion i would agree with g-dub chapter 13 would be the way to go. after reading all the replies this one seems to be they best choice from what i see as your options. if you consider all they people that are getting there credit scores hit hard in this economic time i doubt it will hurt you that much, unless you are planning a large purchase very soon ( car,etc) i doubt it will hurt as bad as you are thinking. hope this helps

  14. MyJourney Says:

    Stew,

    I don’t know your full situation, so I am unable to give an accurate opinion. That being said, I implore you to talk to compentent people in and around your area that fully understand real estate and bankruptcy law.

    State X might have recourse loans whereby you aren’t liable for the extra 60K, while State Y has non-recourse loans where they can come after you for that extra amount. Also, everyone is throwing the idea of Chapter 13, you may or may not even qualify for chapter 13.

    Please, Implore you to either talk to legal counsel or a real financial professional with experience in this area before undertaking any action.

    With all that being said, have you called the bank holding the old mortgage, and inform them that you might default? I have heard stories where the bank will voluteer a modification! Could work.

    Regardless, I am pulling for you.

  15. Kacie Says:

    OW!! I’m so sorry you’re dealing with this. I don’t know your current housing situation — are you renting or do you have another mortgage?

    I think you’re in such a bad predicament that you probably shouldn’t worry about your credit score that much. You’re broke and hopefully you won’t be borrowing any more money any time soon.

    Go with the short sale. Get rid of this money pit as soon as you can unload it. Then, build up your savings and get out of debt. Then, be ultra-aggressive with your retirement savings.

    Good luck!

  16. Wendy Says:

    oh, Stew-
    What a pcikle to be in , for sure! I’m not sure where your hosue is, but can a rent to own progrma work for you? You can certianly charg mroe as a ret to own- I’m hoping to find one myself, soon (you’re not in Ct or NY, are you??? ;)

    Praying for you and your family-

  17. Fran Says:

    Do you own the home you’re living in now? I wasn’t clear on that. If you do, what are the chances of selling that in the interim? Or moving back to the one you left? Just another option that I didn’t see.

  18. Stew Says:

    Kathy – that is the direction I am leaning . . .

    Jimmy – I am not planning any large purchases – just working on getting out of debt. I just can’t believe what I might do to my credit score . . .

    myjourney – I have thought about that, but I don’t think they would modify the mortgage of a home in which I am not living, would they?

    Kacie – we are renting in our current location and I don’t plan to buy another house for a very long time. :)

    Our home is more or less a starter home. We had put approx. $25,000 toward improvements, but it needed another $15,000 before it would be in a place that would make it a good prospect for resale.

    It does not make a good rental property in it’s current condition. We were able to get $700 without utilities. If we had the renter pay utilities, I don’t think we could get more than $500 or $550 per month.

    I had a pretty sudden job change – I like our new location and my new job and my rate of pay is fine – except for this other house . . .

  19. Stew Says:

    ABC’s – I think your suggestions are very concise. I have certainly thought about just forgetting about my credit score . . . tough way to go, though. I have taken very good care of that little number . . .

  20. Miss T Says:

    As it stands you are making $500 per month payment on this house. Is there any way to either a) trim $500 from your budget or b)earn another $500 per month for this?

    I am like you, my credit score is a true source of pride for me – my husband and I have worked so hard to keep it in good standing. I’m not willing to have it go in the toilet for a couple hundred dollars a month and a feeling of defeat. (You WILL feel bad if you let the house go…) We’ve seen lean times where we took up part time jobs to fill the gaps in our budget. It stinks…but we look at those times with pride. We know that we met the needs of our budget and our family. And those “lean times” passed.

    When you bought the house you made an investment decision – and investments sometimes need time to pay off.

    Just my 2 cents…since you were askin’! Good luck.

  21. Workin' from Home Says:

    Stew, You are in a mess.

    When I was in my late 20′s I built a new house without selling my old one first. It was 1980. I owned that first house for 2 years after I moved into the new one. Our consruction loan went to 18% and we had trouble finding permanent financing because we still owned the old house. It was painful. We rented it for awhile. Finally, I lowered the price and put it back on the market and sold it. Although it did go down in value about 10%, I had put 20% down so I was able to pay off the mortgage. I realize your situation is worse than that. Selling that old house was the best money I ever lost.

    I suggest you forget about your credit score and go for the short sale. The worst that can happen is the bank will say no. Just be sure to make your acceptance of the buyer’s offer contingent on the bank accepting the short sale without recourse or at least some recourse you can afford.

    Don’t start borrowing money on credit cards to live. You will self-destruct.

    I can tell you that time heals a lot of things. 27 years this side of that debacle we have no debt whatsoever, a nice paid for home, and eight wonderful children, four of which are still at home. God has blessed us mightily and I learned a lot of humility.

  22. Christine Says:

    You don’t have to claim short sale money as federally taxable income through 2009.
    http://ezinearticles.com/?How-Do-I-Claim-a-Short-Sale-Or-Short-Refi-on-My-Taxes?&id=1623594

  23. Marsha Says:

    A few weeks ago I turned down an attractive offer to relocate because I am under water on my house – my house’s value has dropped about 40% since I bought it last year. I know it’s a different situation than yours, but I was faced with some similar options.

    I think that ultimately, if the pull of the relocation had been strong enough, I would have looked for someone I _really_ trusted to be a property manager and have rented out the house (even though I’d only be able to get about 60% of my mortgage payment in rent).

    Personally, I have a moral issue with doing a short sale, default, or bankruptcy where it is not 100% necessary. I could be misguided on this point however – and it may be that the current economy will ultimately have an effect of recalibrating our financial morals.

    I have since thought of another option that I did not check out – just selling the house and trying to get a loan to pay off the additional amount that I would owe. In my case, that would be some gigunda loan.

    Good luck to you and your family!

  24. MyJourney Says:

    @Christie,

    I am almost positive that is only for your primary home (it is under the Mortgage Debt Relief Act of 2007).

    @Stew,

    I am not sure whether they would or wouldn’t but really what is the harm in asking? There is none. Banks are not in the business of being property owners, they don’t like it and don’t want it. Just telling someone that you MIGHT default may be enough to get some action.

  25. Miss T Says:

    Sometimes the “financial” choice is not the biblical choice. This is a Christian finance blog, I agree with Marsha when she says it’s also a moral decision. Have you prayed about it, have you trusted GOD to provide for the choices you’ve made. Are you being obedient in using the gifts He gave you to make this situation work?

    Perhaps you didn’t employ the best stewardship when you bought the house…everyone was buying, it was a crazy time in the market, people overextended on the promise of increasing values and big payouts in a couple years. But now here we are, faced with the result. Money might get tight. People might have to work more hours or cut back on expenses. It stinks – but it’s life. But just because everyone is doing something (short sales, etc) doesn’t make it right – isn’t that what got us in this real estate mess in the first place? Don’t just do what’s “popular”…do what’s right.

    Yes, life will go on regardless of your decision. But don’t go down without a fight… Every time I have a setback – I look at it as GOD doing a work in me. Maybe renting that home at a loss will truly bless the occupant – we don’t know how God moves in these situations. Some things truly are more important than money.

  26. No Debt Plan Says:

    Didn’t read through all of the comments, but why not try renting again?

    If your costs are $1,000 to $1,200 per month, even if you could rent it for $800 you are stopping most of the bleeding, perhaps even the point that you can technically afford to keep both houses. Plus then someone else is paying your mortgage off for you.

  27. Fontaine Says:

    I disagree with the comment by ABCs of Investing. You should continue to try and honor the contract and responsibility you assumed. If it comes down to not being able to put food on the table, then you gotta do what you gotta do to protect the family…but otherwise, it’s your problem, not the bank’s. If you were to sell for a profit, would you share it with the bank? Then why make the bank eat your loss?
    I feel for you..I really do. Good luck and I’ll pray for you.

  28. Funny about Money Says:

    During the savings & loan debacle of ancient memory, Semi-Demi-Ex-Boyfriend unloaded his place deed in lieu. He walked away with no debt and no harm to his credit rating; the bank (which itself was in the process of declaring bankruptcy) sold his $40,000 condo for $12,000. SDXB deducted his losses from his income tax over three years.

    Are they even doing deeds in lieu anymore?

    What a predicament. I guess if it were me I’d make three moves at this time:

    1. Track down a Realtor in the old town who specializes in short sales. Most cities now have real estate agents who are experienced with this now and can advise you on whether this would be a reasonable move and what the implications would be.

    2. Talk with the lender and see if they can make any accommodation for you. Deed in lieu is one think to ask about; they may have some other strategies.

    3. Find a professional property manager and see if he or she can find a renter who will pay enough rent that you can carry the rest of the mortgage without going broke.

    IMHO, God does not want you to crash and burn. There’s no moral issue here: mortgage lenders are huge faceless companies that have no compunction about taking advantage of you or, quite frankly, of destroying you and your family for the sake of profit. Take care of yourself and yours, and let Caesar take care of himself.

  29. Fontaine Says:

    Funny About Money, I love your attitude (I really do!) about taking care of yourself and letting Caesar take care of himself. But what’s the limit? How can we encourage someone that gets into too much debt to drop it all and walk away? What comes of this country, and the people, if the message is that we as a country condone irresponsible actions like that? I mentioned in a previous post that I believe when it comes down to paying the bills or putting food on the table, then one’s gotta do what they gotta do. But regardless of the loan agreement in place, when someone agrees to borrow money to pay for a product, they should pay it back. Yes, the banks know what risk they were assuming, but so did the borrower. Banks are in the business to make money. How can we blame a bank for giving us a loan that we shouldn’t have had in the first place? If a person is not that aware of their finances, they shouldn’t be in the borrow/lend marketplace to begin with. I don’t understand how people can encourage others to not be accountable for their actions. No one held a gun to the author’s head and forced him/her to sign the dotted line. It was all voluntary and because things aren’t going well, we encourage them to walk away because our theory is that ‘mortgage lenders are huge faceless companies that have no compunction about taking advantage of you…”? Again, I tend to agree with that statement, but we should be encouraging people to try and find a way out of the problem that is suitable for all, and not simply dropping everything and walking away. Walking away destroys the economy, it destroys the mentality of the people, and it severely lowers the standards of our economy.
    It’s such a tough problem. I really feel for people in over their head. But accountability is a must..for both lenders and borrowers.

  30. Another Reader Says:

    You’re in a hole. Stop digging!

  31. d_h Says:

    Get rid of the home as fast as you can, regardless of credit score damage. It sounds as though you have been through many a night deprived of sleep, is your life worth ruining over 4 – 7 years of a bad credit score?

    All loan forgiveness options have guidelines on who can qualify, and all have credit score implications. But I am sure you have already researched out those options. You need to hire a lawyer to assist with any negotiations with the bank; if you go at it yourself you will emerge battered and bruised; a lawyer will help to soften the punches considerably.

    A note that I didn’t see mentioned here, banks have to approve a short sale and a deed-in-lieu of foreclosure. When a house is upside-down in it’s mortgage it is highly unlikely a bank will approve either unless the following occurs (not an exhaustive list): moving out of the area (your golden ticket); milliary related; insolvency; death; divorce; long-term illness; etc…

    Before most banks allow a deed-in-lieu, they will require you to attempt to short sale for a minimum duration of time.

    I myself am at 240% in my LTV (purchased for 240K, mortgage balance 200K, current home value 83K). I am not an investor, just bought at the wrong time. I have spent over 1 1/2 years cajoling the bank with short-selling and deed-in-lieu, all to no avail. Now my family and I are going to foreclose and move on with our lives.

  32. d_h Says:

    Fontaine, if you were in the same situation as Stew and myself your actions would be no different. The banks’ mortgages are insured, they never loose even when a consumer forecloses; most consumers don’t have that type of insurance on their mortgage, so in an upside-down market the consumer always looses.

  33. upside down Says:

    I agree with d_h. We are currently approx. $71,000 upside down. We’ve felt that we should do the right thing and keep going, but my dh missed out on a very good promotion 2 yrs ago b/c we couldn’t sell our house and move. That was when we were only 13,000 upside down. We now feel that if you buy a stock and it goes down in value, you sell and take a loss. We are planning to short sell. We hope not to foreclose but are not going to ruin the rest of our lives for this mistake. Actually, we were doing well, but then the economy and income went down. I stay home. We’ve cut many costs, are very frugal, and can make the paymt but at the expense right now, of tithing and saving for the future. We also have medical and car repair debt. I think God gives do-overs and will forgive us if this is sin. And don’t forget the banks gave loans to people who couldn’t afford them, to non-citizens, and rooked as many as possible into no-interest loans, this is what caused a lot this problem. Not people who bought responsibly. (we’d have been one, but my dh caught it on closing day, even though we were clear about wanting a fixed rate, they tried to get by a no-interest loan!) Right now, ceasar does not require taxes on the short sale amt. and so we are getting out while we still can!!

  34. upside down Says:

    P.S. I also did get a part-time job. We home school and so we buy all of our own curriculum, otherwise I’d work full time.

  35. GaPeach Says:

    Hi Stew, just curious what you decided to do? I see this post was in 2009. I am going through the very same thing. The only amount I am really upside down in is the amount we owe on my 2nd mortgage. (roughly $33k) I could sell my home and pay off my 1st mortgage if I didn’t have that hanging over our head. I am getting a job transfer (only about 70 miles away) but I still don’t want to commute that far every day. I like you, don’t know what to do and really don’t want to hurt my credit because we would like to buy a nicer home once I transfer. Any advice from the people here? What did you decide Stew? Thanks for writing this article!

  36. Andi Beck Says:

    Hi Stew, you have probably already considered a rent to buy or rent to own option. This is where you find a renter that would like to own the house but cannot afford it right now. You make an agreement that he has the option to buy the home at a future date at a set price. He then move in and pays rental equivalent to ownership – this must at least cover your expenses, treats the home as his own and then at some stage buys the house at the pre-arranged price.
    The property market will go up again and this way you might be ableto sit it out.
    Just some thoughts, Cheers Andi

  37. John Morris Says:

    Just reading this years later! Hope you didn’t choose foreclosure, It can damage you from years to come!

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